Carl Bildt is foreign minister of Sweden. As leader of the conservative Moderate Party, he was prime minister in the 1990s when Sweden had a similar financial meltdown to the US today. He is in New York for the meeting of the United Nations General Assembly.
Being a visitor in New York on these momentous days for the global economy is definitely an experience. though we, political leaders from all over the world, are supposed to deal with global politics, it should not be a surprise to anyone that the intense process between Washington and Wall Street affects the atmosphere in the giant UN building as well. As prime minister of Sweden in the early 1990s, when the country went through a similar crisis, I can easily imagine the strong pressure everyone feels who has been involved in processing the rescue plan. A financial meltdown of such a scale as we see today is dangerous not only for the US and its citizens but an emergency situation for the global economy as a whole.
However, our experience in dealing with an even worse situation — though in regard to a far smaller economy — is that there are perfectly sound and adequate tools at hand if you want to stabilize the situation and regain confidence in the markets. Between 1990 and 1993, Sweden’s GDP dropped by 6 percent, aggregate unemployment went up from 3 percent to 12 percent and the public deficit exploded to 12 percent of GDP. The economic downturn led to massive wave of bankruptcies and falling asset prices. The loan losses in the bank sectors skyrocketed, and the banks had to make provisions for losses equivalent to 12 percent of GDP.
Insolvent
In the fall of 1992, the situation had almost spun out of control. Five out of seven of Sweden’s largest banks, covering 90 percent of the market, were de facto insolvent, and we had to face the fact that all earlier measures had been insufficient. The non-performing loans exceeded by far the banking sector’s total equity capital, and it was obvious that even more decisive actions were necessary. To establish a firm base for further measures, the government, backed by the opposition, issued a bank guarantee that provided protection from losses for all creditors except shareholders. There was no specified sum mentioned in the parliament’s legislation, and the government got a wide mandate to act in other respects as well.
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